Editor’s note: Jim Verdonik and Benji Jones, Co-Founders of Innovate Capital Law discuss Special Purpose Acquisition Company (SPACs) – the hottest trend in capital raising. This is the third of four articles. 

JIM:  In our prior SPAC articles, we discussed SPACs’ explosive 600% growth in 2020 and how to decide whether doing a SPAC deal makes sense for your business.

BENJI:  So, now let’s suppose that a SPAC deal and being public is something I want my business to do.  How do I choose the right SPAC?

JIM:  SPACs can’t tell their investors a specific business they want to buy when the SPAC does its IPO, but they do describe factors like industry, geography and development stage.  So, step 1 in any SPAC deal is identifying which SPACs have most closely described your business.

BENJI:  SPACInsider.com has a list called “SPACs Seeking a Target.”  It had 200+ SPACS listed.

JIM:  That sounds like an internet dating site.

BENJI:  Bingo! 

Each SPAC seeking a merger has a little profile you can read for free.  You can pay to find out more, but you can find out a lot more about each SPAC by looking at SPAC filings with the SEC or hiring an investment banker or other adviser.

JIM:  OK, after I get my list, how do I choose?

What’s a SPAC? And why are they the hottest deals going on Wall Street?

BENJI:  Size matters.  Target companies usually need to have an enterprise value of at least three to four times the cash the SPAC has to make the deal work.  A billion dollar SPAC needs to buy a big opportunity.  Be realistic about what size opportunity your business offers.  Any other tips Jim?

JIM:  Each SPAC has one sponsor or a group of sponsors (aka founders) who organized the SPAC.  They attracted investors based in their track records and reputations.  Look at their past records.  Were their past deals successful.  Or did they crater?  Beware of celebrity sponsors – sports figures and entertainers who lend their names to attract retain investors to SPACs.  I lean toward SPACs that are sponsored by people who have built successful public companies in your industry, but who are still willing and able to help the business after the deal.

BENJI:  VCs and private equity tout themselves as being better because they are “Smart Money.”

JIM:  Well, some VCs and PE managers are Smart Money and other are not.  It’s the same with SPAC sponsors.

BENJI:  Any last tips on choosing s SPAC?

JIM:  Yes.  SPAC’s come with expiration dates.  When a SPAC does its IPO, it usually tells investors that it will return their investment if the SPAC fails to find a merger partner by a given date.  Most deadlines are 18 months to year after the SPACs IPO.  Deadlines can be extended by shareholder vote, but investors who don’t want to extend can get their money back.  SPAC Sponsors hate asking fpr extensions and hate returning money even more. 

BENJI: So, a potential merger partner might have extra negotiating leverage to get the best terms if the SPAC’s deadline is approaching, so it’s an important detail to know. 

What’s a SPAC, part 2: Is going public this way really a good idea for your firm?

JIM:  That’s right!  But there are downsides to trying to merge with an expiring SPAC.  The first is that the SPAC may lose its cash before you can close your deal.  The second downside is that most people don’t like old fish.  What’s wrong with the SPAC?  Its Sponsors? Why has the SPAC been sitting there?  Will that affect the post-merger trading market?  So, be careful about buying expiring bargains in the SPAC market.

BENJI:  OK, now that we’ve discussed how to determine whether a SPAC deal is right for your business and how to identify the best SPAC for you, let’s take a break and discuss in our next article how to get a SPAC deal done.

Jim Verdonik and Benji Jones, Co-Founders of Innovate Capital Law